1_Chapter_1_Introduction_to_Auditing.ppt

©2012 Pearson Education,
©2012 Pearson Education, Auditing 14/e,
Auditing 14/e, Arens/Elder/Beasley
Arens/Elder/Beasley 1 -
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The Assurance Services
The Assurance Services
Market
Market
Chapter 1
Chapter 1

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Adelphia
Enron
Tyco
WorldCom
Sarbanes-Oxley Act
Sarbanes-Oxley Act
The Act established the Public Company
Accounting Oversight Board.
It also requires auditors to report on the
effectiveness of internal control over
financial reporting.

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Learning Objective 1
Describe auditing.
Describe auditing.

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Nature of Auditing
Nature of Auditing
Auditing is the accumulation and evaluation
of evidence about information to determine
and report on the degree of correspondence
between the information and established criteria.
Auditing should be done by a competent,
independent person.

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Information and Established
Information and Established
Criteria
Criteria
To do an audit, there must be information in a
verifiable form and some standards (criteria)
by which the auditor can evaluate the information.
IASB
FASB
Criteria

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Accumulating Evidence and
Accumulating Evidence and
Evaluating Evidence
Evaluating Evidence
Evidence is any information used by the auditor
to determine whether the information being
audited is stated in accordance with the
established criteria.
Client inquiry
Written and
electronic
Communications
with outsiders
Observations
Transaction
data

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Competent, Independent
Competent, Independent
Person
Person
Judgment and
Experience
Evaluation
of Evidence
Competence
Proper
Conclusion
Independence

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To the Board of Directors and Stockholders of
ABC Corporation and Subsidiaries
Anywhere, USA
We have audited the accompanying consolidated balance sheets of ABC Corporation and Subsidiaries (the “Company”) as of December 31, 2010 and
December 31, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ABC Corporation and Subsidiaries
as of December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal
control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2011, expressed an unqualified opinion on
the Company’s internal control over financial reporting.
INTERNATIONAL CPA FIRM LLP
Anywhere, USA
February 28, 2011
The final step communicates the findings to users.
Audit Report
Audit Report

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Audit of a Tax Return Example
Audit of a Tax Return Example

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Distinguish between auditing
Distinguish between auditing
and accounting.
and accounting.

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Distinguish Between
Distinguish Between
Auditing and Accounting
Auditing and Accounting
Accounting is the recording, classifying,
and summarizing of economic events
for the purpose of providing financial
information used in decision making.
Auditing is determining whether
recorded information properly
reflects the economic events that
occurred during the accounting period.

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Explain the importance of auditing
Explain the importance of auditing
in reducing information risk.
in reducing information risk.

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Economic Demand
Economic Demand
for Auditing
for Auditing
Demand Driver Information risk
Auditing can have a significant effect
on information risk.
What is meant by “Information risk”?

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List the causes of information risk, and
List the causes of information risk, and
explain how this risk may be reduced.
explain how this risk may be reduced.

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Causes of Information Risk
Causes of Information Risk
 Remoteness of information
 Biases and motives of the provider
 Voluminous data
 Complex exchange transactions

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Reducing Information Risk
Reducing Information Risk
 User verifies information
 User shares information risk with management
 Audited financial statements are provided

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Relationships Among
Relationships Among
Auditors, Client, and External
Auditors, Client, and External
Users
Users
Auditor
Client
External
Users
Client or audit
committee hires
auditor
Auditor issues
report relied
upon by users to reduce
information risk
Provides capital
Client provides financial
statements to users

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Describe assurance services and
Describe assurance services and
distinguish audit services from other
distinguish audit services from other
assurance and non-assurance services
assurance and non-assurance services
provided by CPAs.
provided by CPAs.

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Assurance Services
Assurance Services
An independent professional service
Can be performed by CPAs or by a variety
of other professionals

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Attestation Services
A type of assurance service
CPA reports on the reliability of an assertion
That is the responsibility of another party.

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Historical
Financial
Statements
1. Audit 3. Review
3. Review
2. Internal
Control over
Financial
Reporting
4. Information
4. Information
Technology
Technology
5. Other

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Attestation Services on
Attestation Services on
Information Technology
Information Technology
WebTrust and SysTrust also meet the
criteria of attestation service

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Other Assurance Services
Most of the other assurance services that CPAs
provide do not meet the formal definition
of attestation services.
The CPA is not required to issue a written report.
The assurance does not have to be about the
reliability of another party’s assertion about
compliance with specified criteria.

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Green Initiatives Bring Assurance
Opportunities, Competition
Global interest has triggered a surge in reports.
80% of the Global Fortune 250 released
environmental, social, and governance data.
Presented in standalone reports or integrated
into annual financial reports.

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Examples
Assess risks of accumulation, distribution,
and storage of digital information…
assessing security risks and related
controls over data and other information
stored electronically, including the
adequacy of backup and off-site storage.
including

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Examples
 Compliance with trading policies and procedures
 Compliance with entertainment royalty agreements
 ISO 900 certification
 Environmental audit

Arens/Elder/Beasley
Assurance, Attestation, and
Nonassurance Services

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Differentiate the three main types of
Differentiate the three main types of
audits.
audits.

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Types of Audits
Types of Audits
 Operational
 Compliance
 Financial Statement

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Operational Audit
Operational Audit
Example
Evaluate computerized payroll system
for efficiency and effectiveness
Information
Number of records processed, costs of
the department, and number of errors
Established
Criteria
Company standards for efficiency and
effectiveness in payroll department
Available
Evidence
Error reports, payroll records, and
payroll processing costs

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Compliance Audit
Compliance Audit
Example
Determine whether bank requirements
for loan continuation have been met
Information Company records
Established
Criteria
Loan agreement provisions
Available
Evidence
Financial statements and
calculations by the auditor

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Audit of Historical Financial
Audit of Historical Financial
Statements
Statements
Example
Annual audit of Boeing’s financial
statements
Information Boeing's financial statements
Established
Criteria
Generally accepted accounting
principles
Available
Evidence
Documents, records, and outside
sources of evidence

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XBRL Electronic Data to Improve
Financial Reporting
Extensible Business Reporting Language
Enables sorting and comparing of financial data
Public companies required to provide interactive
financial statement data

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Identify the primary types of
Identify the primary types of
auditors.
auditors.

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Types of Auditors
Types of Auditors
 Internal auditors
 Independent certified public accounting firms
 Internal Revenue agents
 Governmental general accounting office auditors

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Describe the requirements
Describe the requirements
for becoming a CPA.
for becoming a CPA.

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Three Requirements for
Becoming a CPA
Becoming a CPA
 Educational requirement
 Uniform CPA examination requirement
 Experience requirement

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CPA Examination Sections
CPA Examination Sections
Auditing
and
Attestation
Financial
Accounting
And
Reporting
Business
Environment
and
Concepts
Regulation

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CBT-e: The CPA Exam Gets a
Makeover
New content and skill specification outline
revisions.
Exam structure changes and weighting of
individual exam components.
Coverage of international auditing and financial
reporting standards.

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Becoming a CPA

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End of Chapter 1
End of Chapter 1

1_Chapter_1_Introduction_to_Auditing.ppt

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